Recently, the Kelkar Committee published a roadmap for fiscal consolidation. The report stresses the need and urgency to address India’s fiscal deficit. A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons. The fiscal deficit is financed by government borrowing; increased borrowing can crowd out funds available for private investment. High government spending can also lead to a rise in price levels. A full PRS summary of the report can be found here. Recent fiscal trends Last year (2011-12), the central government posted a fiscal deficit of 5.8% (of GDP), significantly higher than the targeted 4.6%. This is in stark contrast to five years ago in 2007-08, when after embarking on a path of fiscal consolidation the government’s fiscal deficit had shrunk to a 30 year low of 2.5%. In 2008-09, a combination of the Sixth Pay Commission, farmers’ debt waiver and a crisis-driven stimulus led to the deficit rising to 6% and it has not returned to those levels since. As of August this year, government accounts reveal a fiscal deficit of Rs 3,37,538 crore which is 65.7% of the targeted deficit with seven months to go in the fiscal year. With growth slowing this year, the committee expects tax receipts to fall short of expectations significantly and expenditure to overshoot budget estimates, leaving the economy on the edge of a “fiscal precipice”.
Figure 1 (source: RBI)
Committee recommendations - expenditure To tackle the deficit on the expenditure side, the committee wants to ease the subsidy burden. Subsidy expenditure, as a percentage of GDP, has crept up in the last two years (see Figure 2) and the committee expects it to reach 2.6% of GDP in 2012-13. In response, the committee calls for an immediate increase in the price of diesel, kerosene and LPG. The committee also recommends phasing out the subsidy on diesel and LPG by 2014-15. Initial reports suggest that the government may not support this phasing out of subsidies.
Figure 2 (source: RBI, Union Budget documents, PRS)
For the fertiliser subsidy, the committee recommends implementing the Department of Fertilisers proposal of a 10% price increase on urea. Last week , the government raised the price of urea by Rs 50 per tonne (a 0.9% increase). Finally, the committee explains the rising food subsidy expenditure as a mismatch between the issue price and the minimum support price and wants this to be addressed. Committee recommendations - receipts Rising subsidies have not been matched by a significant increase in receipts through taxation: gross tax revenue as a percentage of GDP has remained around 10% of GDP (see Figure 3). The committee seeks to improve collections in both direct and indirect taxes via better tax administration. Over the last decade, income from direct taxes – the tax on income – has emerged as the biggest contributor to the Indian exchequer. The committee feels that the pending Direct Tax Code Bill would result in significant losses and should be reviewed. To boost income from indirect taxes – the tax on goods and services – the committee wants the proposed Goods and Service Tax regime to be implemented as soon as possible.
Figure 3 (source: RBI)
Increasing disinvestment, the process of selling government stake in public enterprises, is another proposal to boost receipts. India has failed to meet the disinvestment estimate set out in the Budget in the last two years (Figure 4). The committee believes introducing new channels [1. The committee suggests introducing a ‘call option model’. This is a mechanism allowing the government to offer for sale multiple securities over a period of time till disinvestment targets are achieved. Investors would have the option to purchase securities at the cost of a premium. They also propose introducing ‘exchange traded funds’ which would comprise all listed securities of Central Public Sector Enterprises and would provide investors with the benefits of diversification, low cost access and flexibility.] for disinvestment would ensure that disinvestment receipts would meet this year’s target of Rs 30,000 crore.
Figure 4 (source: Union Budget documents, PRS)
Taken together, these policy changes, the committee believe would significantly improve India’s fiscal health and boost growth. Their final projections for 2012-13, in both a reform and no reform scenario, and the medium term (2013-14 and 2014-15) are presented in the table below: [table id=2 /]
The protests against the nuclear power plant at Kudankulam have intensified over the recent weeks. The Kudankulam plant is expected to provide 2 GW of electricity annually. However, activists concerned about the risks of nuclear energy are demanding that the plant be shut down. The safety of nuclear power plants is a technical matter. In this blog post we discuss the present mechanism to regulate nuclear energy and the legislative proposals to amend this mechanism. Atomic materials and atomic energy are governed by the Atomic Energy Act, 1962. The Act empowers the central government to produce, develop and use atomic energy. At present, nuclear safety is regulated by the Atomic Energy Regulatory Board (AERB). Some of the drawbacks of the present mechanism are discussed below. Key issues under the present nuclear safety regulatory mechanism The AERB is not empowered to operate as an independent operator. The AERB was established by the government through a notification and not through an Act of Parliament. Its powers and functions are therefore amendable by the Department of Atomic Energy through executive orders. The parliamentary oversight exercised upon such executive action is lower than the parliamentary oversight over statutes. [1. The executive action or the Rules are in force from the date of their notification. They are to be tabled before Parliament mandatorily. However, an executive action is discussed and put to vote in Parliament only if an objection is raised by a Member of Parliament. The executive orders may be reviewed by the committee on sub-ordinate legislation. However, this committee has to oversee a large volume of rules and regulations. For instance, there were 1264 statutory notifications that were tabled before the Rajya Sabha in 2011-12.] Furthermore, the Atomic Energy Commission that sets out the atomic energy policy, and oversees the functioning of the AERB, is headed by the Secretary, Department of Atomic Energy. This raises a conflict of interest, as the Department exercises administrative control over NPCIL that operates nuclear power plants. It is pertinent to note that various committee reports, including a CAG Report in 2011, had highlighted the drawbacks in the present regulatory mechanisms and recommended the establishment of a statutory regulator. A summary of the Report may be accessed here. Proposed mechanism Following the Fukushima nuclear incident in 2011, the Nuclear Safety Regulatory Authority Bill, 2011 was introduced in Parliament to replace the AERB. The Bill establishes the Nuclear Safety Regulatory Authority (NSRA) to regulate nuclear safety, and a Nuclear Safety Council to oversee nuclear safety policies that the NSRA issues. Under the Bill, all activities related to nuclear power and nuclear materials may only be carried out under a licence issued by the NSRA. Extent of powers and independence of the NSRA The Bill establishes the NSRA as a statutory authority that is empowered to issue nuclear safety policies and regulations. The Nuclear Safety Council established under the Bill to oversee these policies includes the Secretary, Department of Atomic Energy. The conflict of interest that exists under the present mechanism may thus continue under the proposed regulatory system. The Bill provides that members of the NSRA can be removed by an order of the central government without a judicial inquiry. This may affect the independence of the members of the NSRA. This process is at variance with enactments that establish other regulatory authorities such as TRAI and the Competition Commission of India. These enactments require a judicial inquiry prior to the removal of a member if it is alleged that he has acquired interest that is prejudicial to the functions of the authority. The proposed legislation also empowers the government to exclude strategic facilities from the ambit of the NSRA. The government can decide whether these facilities should be brought under the jurisdiction of another regulatory authority. These and other issues arising from the Bill are discussed here.
